Multifamily Investing Trend of 2022
There’s been a recent trend over the last year or so where 100+ unit investors are picking up under 100 unit deals. There’s a good reason why. I was on Jerome Meyer’s podcast recently called “Multi-family Missteps” and we talked about this phenomenon of investors picking up these under 100 unit deals. The lack of 100 + unit deals coming available for sale has forced some investors to consider alternative-sized deals in order to supplement and place their equity.
We've all been saying things are out of whack since 2014. The question is will we be saying the same thing in 2026. In 2026 will you be wishing that you had bought a lot of things in 2021 and 2022? I don't see things going in reverse or slowing down in the multi-family field. Housing prices may slow down a little bit coming up, office conditions can always change, the retail sector can change. But when it comes to industrial and multi-family, we are so far behind in what we need to deliver to meet the demand, I don't know that we ever will. Under 100 units people are paying a little more than what the rent is increasing, but that's only because under 100 unit deals for so long have not gotten their dues. They have traded at a gross rent multiple, or a cap rate, or whatever metric you want to go by, lower than 100 plus units by a large margin for a very long time. And I get why it is; because big players want to place a lot of capital at one time and they're willing to pay more for that. Smaller properties run on lower operating expense ratios. So, let’s just use gross rent multiples because I don't ever trust cap rates. Gross rent multiples, when looked at in the macro sense, not pricing any one property, you can really tell a good story. So gross rent multiples for under 100 unit deals have typically traded around 8-8.1 and 100+ unit deals are trading at about 9.4-9.5. Now those 8’s in the under 100 unit sector are now crossing into the 9’s partly because people are noticing these are good profitable assets. You just have to buy more of them in order to place your capital. But secondly, there's just such a lack of opportunities in 100+ units that some of the big boys are buying 60, 70, 80 unit deals. And it's funny because most people say I don't want that, that's a tweener, I can't do anything with it, it's too small to put somebody on site. And it's too big for third-party offsite to handle it. I think it's a big mistake for those who have the ability to buy tweeners to think that way. I get it if you are a 5,000 unit syndication; time is money. You only have so many manpower resources and it takes the same amount of time to do a 30 unit deal as it does the 200 unit deal; it's tough to really concentrate on anything smaller. However, for those that are small to medium-sized syndications, mom and pops, wealthy individuals, or partnerships, all those 20-40-80 unit deals that you would have normally passed up will add up over the next five years. You will be 300 units ahead of someone else who only concentrate on those 100+ unit deals. Especially if you've concentrated in a specific market, and you’ve bought five or six 20-30-60 unit assets in that one market, you've got a hell of a management engine now. So now when you pick up the 100 or 200 unit deal in that same market, you're already ahead of someone else because you got those efficiencies in place. There are players who have the ability to knock down 200, 300 unit deals all day that have modified their model to pick up some smaller assets and learn how to manage them efficiently. People are missing out on the smaller assets and opportunity to grow their portfolio profitably by saying they're only going to do 100 + unit deals. And I say why? You aren’t managing them, someone else is managing for you. It's not like the principal is going to be on-site managing the asset. They're going to be managed by a third-party company and all you have to do is collect a check. They see it only as the time it takes to do a deal and the resources spent to get that smaller deal done. That's why they get passed up. It still takes 60 days of effort of doing a phase 1, doing the PSAs, the inspections, negotiating the debt, all those things take human resources, but it's a finite amount of time. If you don't have three other 200 + unit deals going on you might as well knock one of these smaller ones out because in 10 years if you held it and you threw everything at it and you paid it off, in 10 years it will be nice to have a 50 unit deal that’s free and clear bringing in cash. Again, I’m talking about the investors that have the ability to do this. Not the guys who are already so big that it would actually cost them money to provide the resources to pick up these smaller assets. I’m challenging the vast majority of the folks who are in syndication school right now. There's a tremendous amount of opportunity here. The expenses for these under 100 unit deals are often less per unit than 100 + unit deals are. And oftentimes the rents are as high as the rents of the 100 + unit deals, obviously depending on the market. I get it. Buying 100 + unit deals make a lot of sense. It's what I prefer to broker. But I also understand the benefit of having smaller assets as part of the portfolio.
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